A plywood car might suck some of the perceived stigma off the nano.
Perhaps though, it's time to think about alternatives to building yet more 4 wheeled polluters, though it's morally hard to tell Indians that they should stick with their scooters.
Cheap in price is in general associated with cheap in quality as well - market psychology. People buy it only when they feel it is good enough. Nano having been already branded and popularized as cheap in price got severely damaged by a few glitches and got rebranded as cheap in quality.
Essentially, production delays and a few unpopular news items made people reconsider their choices and before Nano could recover the market is filled with cars in the small segment made by Honda (who thought of a Honda car in small segment), Maruti/Suzuki, Ford, Hyundai...etc. Also remember that it was Nano which spawned a new generation of small segment cars by various manufacturers who would otherwise have not considered the option at all.